How the Binance, FTX deal rocked the crypto world and then collapsed
(Bloomberg) — It’s been a tumultuous few days in the largely unregulated cryptocurrency world, with mudslinging on Twitter, a shock exchange offering — which then collapsed — and plummeting token values.
On Tuesday, the world’s largest exchange, Binance Holdings Ltd., was to buy troubled rival FTX.com. On Wednesday, Binance walked away from the deal citing problems with FTX’s finances as well as potential regulatory investigations. The decision to walk away reinforced the ongoing crypto rout, with Bitcoin falling to its lowest level in two years.
While crypto may seem like a niche corner of finance, the saga between two of the top players has changed the crypto ecosystem and is likely to have far-reaching consequences.
What is Binance and FTX?
They are two of the largest crypto exchanges, which are marketplaces where investors buy, sell and store tokens. Binance is by far the largest crypto exchange by volume – and FTX is in the top five, according to crypto data provider CoinMarketCap (which is owned by Binance).
Who runs them?
They have also been led by two of the most visible and charismatic people in the crypto world: Binance by Changpeng Zhao (or CZ, as he is known), and FTX by Sam Bankman-Fried (or SBF).
Formerly a trader on Jane Street, until just a few weeks ago the curly-haired 30-year-old was all over the crypto industry – backing flailing projects including BlockFi, Voyager Digital and Celsius. He counted the likes of Softbank Vision Fund, Singapore wealth fund Temasek and the Ontario Teachers’ Pension Plan as investors.
Zhao is a Chinese-born Canadian citizen who emigrated to Vancouver at the age of 12 and graduated with a degree in computer science from McGill University in Montreal. He started Binance in 2017 in Shanghai – but the Chinese government banned the crypto exchange that same year. He is now based in Dubai.
Read more: Crypto’s richest man faces regulatory crackdown, brutal winter
Why did they fall out?
Back in 2019, Binance invested in FTX, then a derivatives exchange. The following year, Binance launched its own crypto derivatives, quickly becoming a leader in the field.
Tensions increased as the two companies took increasingly divergent approaches to regulators. Bankman-Fried testified in the US Congress, while Binance was said to be facing regulatory investigations around the world.
The two companies have also competed for assets, with both bidding for Voyager Digital’s assets. FTX.US, the American subsidiary of FTX, won the auction.
Zhao and Bankman-Fried have been trading barbs on Twitter for months, sparring over issues ranging from lobbying US politicians to claims of front-running.
So what exactly happened in the crypto world?
Over the weekend, Zhao tweeted that Binance would liquidate its holdings of a token known as FTT, which is issued by FTX.
The tweet followed a story from crypto news outlet CoinDesk that said Alameda Research, a trading house owned by FTX founder Bankman-Fried, had many of its holdings in the FTT token.
This led to wider concerns about FTX’s health and investors started pulling out. The FTT token plunged. A day before the deal was struck, Bankman-Fried said on Twitter that assets at FTX were “fine” and that “a competitor is trying to go after us with false rumors.”
On Tuesday, CZ announced a potential takeover of FTX, with due diligence to be completed “in the coming days.”
Then late Wednesday afternoon New York time, Binance said it was pulling out of the deal, saying the competitor’s problems were “beyond our control or ability to assist.” Binance executives had discovered a gap between FTX’s liabilities and assets that could amount to more than $6 billion, a person familiar with the matter told Bloomberg.
In addition, US regulators are investigating whether FTX handled client funds properly, as well as its relationship with other parts of Bankman-Fried’s crypto empire, including his trading house Alameda Research, Bloomberg News reported on Wednesday.
What does this mean for the markets?
That has injected a lot of uncertainty for investors worried about the potential for contagion given the central role FTX and its co-founder Sam Bankman-Fried played in the industry.
FTT, the utility symbol of the FTX exchange, collapsed by more than 40% on Wednesday after falling more than 70% on Tuesday. But just about every digital coin is struggling.
Bitcoin fell as much as 15% to $15,987 on Wednesday, the least since November 2020, leaving many owners underwater.
What does this mean for FTX users?
It is unclear. Customers worried about the exchange’s future have already withdrawn $430 million worth of Bitcoin in just four days.
Read more: Retail crypto investors rattled as Binance moves to acquire FTX
How does this affect CZ and SBF?
It’s a big comedown for SBF, who had previously been seen as one of the most accomplished people in the business.
It plays out in fortunes too. Bankman-Fried’s 53% stake in FTX was worth about $6.2 billion before Tuesday’s takeover, according to the Bloomberg Billionaires Index, based on that fundraising round and the subsequent performance of publicly traded crypto companies. His crypto trading house, Alameda Research, contributed $7.4 billion to his personal fortune.
Bloomberg’s Wealth Index assumes that existing FTX investors, including Bankman-Fried, will be completely wiped out by Binance’s bailout, and that the root of the exchange’s problems stemmed from Alameda. As a result, both FTX and Alameda gain a value of $1. That leaves SBF’s net worth at about $1 billion, down from $15.6 billion entering Tuesday. The 94% loss is the biggest one-day collapse ever among billionaires tracked by Bloomberg.
Even after pulling out of the deal, Bankman-Fried’s fall from grace leaves CZ as the top person in the crypto world. He’s also had a tough time, with his fortune down 84% so far this year, according to the Billionaires Index – but he’s still estimated to be worth $14.9 billion.
What does this mean in terms of regulation?
This episode and how quickly it unfolded sets a stark example for regulators who have been concerned about the lack of guardrails in the freewheeling crypto space. Jurisdictions that have considered looser rules may be less likely to do so — especially in light of the implosions a few months ago of the Terra/Luna ecosystem and hedge fund Three Arrows Capital.
What will be next?
Bankman-Fried told FTX.com investors on Wednesday that the company needs a cash injection or it would have to file for bankruptcy, Bloomberg News reported.
Whether FTX survives this crisis or not, the entire industry is on edge about the risk of infection.
–With assistance from Tom Maloney.
(Updates throughout with details on Binance deal collapse)
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